IRS eases rules on Canadians filing taxes in the U.S.

U.S. tax authorities are relaxing the rules and lightening penalties to induce American and dual citizens living abroad to comply with tax filing rules in the United States.

Michael Danilack, a deputy commissioner at the Internal Revenue Service (IRS), said the changes should mean those affected — including up to one million people in Canada — “can sleep at night” knowing that they comply with U.S. rules and no longer face the prospect of financial penalties even if they owe no taxes.

“I’m assuming many of them are worried,” he said during a conference call Wednesday to discuss the revisions. “These are exactly the types of folks we would elect to be coming in [through the new] streamlined procedures.”

He acknowledged that some filing documents could be “scary,” and said the U.S. tax authority is not looking to be severe with people who did not file because of a “good faith misunderstanding of the requirements of the law.”

The changes open the simplified version of the IRS voluntary disclosure program to people with larger tax debts, and eliminate a “risk” questionnaire that could open the file to another level of review. They come ahead of new rules that will require banks to hand over information about clients who are American citizens to the IRS, which many feared would trigger an audit of their taxes and potentially affect their ability to cross the U.S. border.

Unlike other countries, U.S. tax laws are based on citizenship rather than residency. There are an estimated one million dual citizens and Americans living in Canada who are affected by these rules.

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Max Reed, a U.S. tax lawyer who co-authored a book on the implications for U.S. and dual citizens living in Canada of a worldwide IRS crackdown on tax cheats, said Wednesday’s changes are “significant.”

This will allow U.S. citizens living in Canada to come into compliance before July 1, when financial institutions must start reporting information on their U.S. citizen account holders to Canadian tax authorities. The Canada Revenue agency must then give it to U.S. tax authorities, he said.

An important detail of the IRS changes is a “guarantee that there will be no penalties imposed on those who take advantage of this expanded program,” Mr. Reed said.

The IRS toughened its stance in another area on Wednesday, with higher penalties for taxpayers whose banks and advisors are under investigation for allegedly aiding tax evasion. The agency encouraged those taxpayers to come in under a more complicated procedure that allows some protection from prosecution.

“If you’re engaged in willful tax evasion, time is getting quite short for you to come in,” Mr. Danilack said at a news conference in Washington. “Enforcement efforts in this area are continuing to thrive. We are very intent on stamping out noncompliance in this area.”

Typically, taxpayers who come forward must pay back taxes and penalties. For the IRS, the voluntary disclosure program has provided a way to gather information about taxpayers and promote future compliance.

“This opens a new pathway for people with offshore assets to come into tax compliance,” IRS Commissioner John Koskinen said in a statement. “We provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”

Since the IRS began a voluntary disclosure program in 2009, more than 45,000 people have come forward, resulting in about US$6.5-billion in back taxes, interest and penalties, the agency said.

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